Is fintech the key to African SMEs' Covid-19 recovery?

Over the next 15 months, Africa is set to receive a total of $50bn towards its economic recovery from the World Bank, which has identified the protection of the region's small and medium-sized enterprises (SMEs) as essential to its economic bounce-back from the coronavirus. Financial technology (fintech) has a key role to play in this.

SMEs have proven particularly vulnerable to the economic side-effects of Covid-19, such as increased operating costs due to supply chain disruption, or the need to diversify customer bases and suppliers.  

However, throughout the pandemic fintech solutions have been helping the continent's SMEs overcome these and other challenges, principally by enabling digital transactions and facilitating fast and convenient access to credit.

The World Bank has thus encouraged Africa to invest in digital technology, through the introduction of new digital platforms, the installation of digital infrastructure, the development of digital skills and the establishment of an enabling regulatory environment.

Benefits of digital payments

One of the primary benefits that fintech can provide to SMEs is electronic payments.

The appeal of such methods has grown during Covid-19, as they eliminate the need for cash  – a potential vehicle for the virus. Electronic payments not only enable customers to maintain physical distance from cashiers, but also to pay for goods and services from their homes, generating business for local SMEs that can provide at-home services.

As Covid-19 subsides, the recent spread of cashless solutions will need to be sustained. For this to happen, the benefits of digital payment systems need to outweigh the convenience of cash.

Both businesses and customers may prefer cash to digital payment for small purchases, due to the low comparative cost – there being no additional fees or surcharges – and the fact there are no barriers to entry. Indeed, Juliet Anammah, chairwoman of Jumia Nigeria and head of institutional affairs of the e-commerce group across Africa, recently told OBG that reducing costs would be key to encouraging Nigerians to opt for digital transactions.

The continent has seen some support for electronic financial services at an institutional level. For example, the Central Bank of Kenya (CBK) announced in March that banks would waive fees for financial transfers via mobile banking.

Further to this, in the same month Kenya’s Safaricom announced that all user-to-user transactions under KSh1000 ($9.38) would be free for 90 days, and increased the daily transaction limit for SMEs from KSh70,000 ($657) to KSh150,000 ($1400).

The private sector has also helped lower the cost of digital transactions for African users, with Lagos-based Paga and JumiaPay both reducing user fees.

Even beyond the period of Covid-19-related restrictions, digital transactions can offer economic benefits to Africa’s SMEs, among them a reduced economic cost of handling cash. For example, the efficiency of delivery companies would be improved by reduced need for their drivers to have the correct change for cash transactions, which is a particular challenge in markets that have highly inflated currencies.

Increased access to funding options

Another way in which digital solutions can benefit SMEs is by expanding their access to finance.

Even before Covid-19 many SMEs had insufficient access to formal financing: the International Finance Corporation (IFC) estimates that there is a global funding gap equivalent to $5.5trn a year.

SMEs in Sub-Saharan Africa are among the world’s most financially constrained. In Nigeria, for example, fewer than 7% of SMEs have ever taken out a formal loan, and formal small business loan requests are rarely approved.

Challenges faced by SMEs may include a lack of collateral, limited access to physical branches, or exclusion from the formal lending system, with extensive documentation required to produce a credit score.

In light of these conditions, informal lending through family and friends has traditionally been more a viable source of financing.

As technology has advanced, digital financing solutions can now assess risk by using online data and analytics to disburse loans quickly. This is the stand-out appeal of financing through fintech platforms for SMEs.

Some providers also offer digital microloans: Nigerian lender Lidya, for instance, disburses loans to small businesses of as little as $150 in 24 hours. 

Sidestepping infrastructure challenges

While Covid-19 may have accelerated the uptake of digital platforms in Africa, significant ICT infrastructure gaps still exist, particularly in more remote areas.

A particular challenge is the low rate of internet access. The penetration of mobile internet stands at 24% in sub-Saharan Africa, according to GSMA, a global industry organisation.

Quick response (QR) code payments may offer a solution in this regard, by facilitating instant payments for goods and services from different funding sources, including mobile wallets, cards, bank accounts.

These payments, which are initiated when a consumer scans a code on their smartphone, are still in the early stages in Africa. Nevertheless, Ghana’s introduction of a universal QR code system in May, the first on the continent, is a promising sign.

Tech innovations to lead recovery

The results of OBG’s latest Africa CEO survey, released in May 2020, suggest that technology will underpin recovery: almost half of respondents reported that their firm is currently investing significantly or very significantly in innovative tech solutions, to allow operations to resume or continue to run smoothly

On the fintech side,  Africa’s payment providers are most likely to seek revenue growth by expanding into new countries on the continent and partnering with incumbents, according to investment insights company Tellimer, while lenders will be more inclined to widen their offerings of products and services.

These solutions, alongside accelerating technological development, point towards considerable potential for investments in digital technology to aid Africa’s Covid-19 recovery efforts.

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